“The public service gamble: Councils borrowing billions to play the property market”

New report from the Bureau of Investigative Journalism:

“In the last two years, the number of councils investing in property has doubled. In the past financial year alone, councils spent a total of £1.8 billion on investment properties, a six-fold increase from 2013-14.

Of biggest concern is the scale of debts accrued by four of the smallest local authorities in England – including Spelthorne Borough Council in Surrey, which says it is “heavily reliant on investment income” to fund the services it provides.

Spelthorne has so far borrowed £1 billion despite having a net annual budget of just £22 million – this equates to 46 times its spending power. Three other councils, Woking, Runnymede and Eastleigh, have borrowed more than ten times their budget.

The Bureau has obtained details of the property investments made by more than 100 local authorities. Today we have published the details in full, providing unprecedented insight into how councils are becoming property speculators – with additional details on the millions paid to property and finance consultants.

Properties bought by councils include a BP business park in Sunbury purchased by Spelthorne for £392 million; a Tesco Extra bought for £38.8 million by East Hampshire District Council; branches of Waitrose and Travelodge acquired by Runnymede District Council for £21.7 million and a B&Q store that is now owned by Dover District Council. Other acquisitions range from farmland and gyms to a Royal Mail depot and a solar farm.

Councils say they have been forced to find new ways to generate income given the steep cuts in central government funding, which the National Audit Office calculates has fallen by half in real terms since 2010.

But experts warn that commercial property investments are volatile, and the fact that councils are financing them through borrowing makes them even riskier. If anything goes wrong, the consequences for taxpayers could be severe.

“This is a risk that local authorities have never been exposed to before”
“If you look at the most extreme examples, there are public services used by vulnerable people which are dependent on how well rental income in the property market is doing,” said Don Peebles, Head of Policy for the Chartered Institute of Public Finance and Accountancy (CIPFA), which oversees council finance and publishes the guidelines local authorities are supposed to follow.

“This is a risk that local authorities have never been exposed to before and you have to ask whether they are equipped to handle that risk.”

Warnings unheeded

The spending spree has been made possible by councils’ easy access to low interest loans from the Public Works Loans Board (PWLB), a national government body. There are no limits to how much councils can borrow and they do not have to prove they can afford it – the PWLB leaves this up to councillors to decide. … “

One thought on ““The public service gamble: Councils borrowing billions to play the property market””

The thing about speculation – whether property or shares or casino-based – is that you are taking risks in the hope of making a sizeable profit. Sometimes you will make a profit, but sometimes you will make a big loss. Hedge funds understand this and spread the risks over tens or even hundreds of such deals – and those that pay off more than cover for those that don’t.

But councils have neither the funds nor the bandwidth to spread the risk in this way. They will make bets on one or at best a few property deals – and sooner or later one or several councils, perhaps even our own, will come unstuck when a property deal goes wrong and they find themselves making a huge loss with public funds or even go bankrupt.

Council’s do not exist to be property speculators using public money – they are there to provide public services. If I wanted my council tax to be used for gambling then I would use my council tax payment to buy several hundred lottery tickets, and then give the council the lottery tickets in payment.